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Dominos unveils growth plans, and Games Workshop joins the FTSE 100
1.3k Plays4 months ago
Welcome to the very first episode of Companies and Markets Weekly. We hope you enjoy this new podcast from Stockopedia, where we aim to help you spot the investing lessons behind each week’s headlines.
If you enjoyed this, you can read daily analysis on noteworthy and hard-to-research shares with Stockopedia’s Daily Stock Market Report. You’ll also unlock award-winning investing insights, tools, and education to speed up your research process and help you make more informed decisions.
Try Stockopedia free for 14 days at stk.pe/pod.
Let us know what you thought of this episode: https://www.surveymonkey.com/r/NG3L235
Stocks discussed:
GOOGL: https://www.stockopedia.com/share-prices/alphabet-NSQ:GOOGL/
BOO: https://www.stockopedia.com/share-prices/boohoo-LON:BOO/
DOM: https://www.stockopedia.com/share-prices/dominos-pizza-LON:DOM/
BBSN: https://www.stockopedia.com/share-prices/brave-bison-LON:BBSN/
STEM: https://www.stockopedia.com/share-prices/sthree-LON:STEM/
SQZ: https://www.stockopedia.com/share-prices/serica-energy-LON:SQZ/
IPX: https://www.stockopedia.com/share-prices/impax-asset-management-LON:IPX/
GAW: https://www.stockopedia.com/share-prices/games-workshop-LON:GAW/
Extra Stockopedia content we mention:
The Profit Warning Survival Guide - https://www.stockopedia.com/academy/reports/the-profit-warning-survival-guide/
The Makings of a Multibagger - https://www.stockopedia.com/academy/reports/makings-of-a-multibagger/
“Ahead of Expectations” - the three most powerful words in investing (subscriber only) - https://app.stockopedia.com/content/ahead-of-expectations-three-of-the-most-powerful-words-in-investing-1017620
The Week Ahead (subscriber only) - https://app.stockopedia.com/content/the-week-ahead-1620-december-tstl-dotd-1017925
Host: Lawrence Judd
Analysts: Graham Neary, Roland Head
Disclosures: At the time of recording, Roland holds shares in Serica Energy (SQZ). Graham also opened a long position in Impax (IPX) immediately after recording.
Disclaimer: We do not provide personalised financial advice. None of our content constitutes or should be understood as constituting a recommendation to enter in any securities transactions or to engage in any investment strategies discussed in our content. We do not provide personalised recommendations or views as to whether a stock or investment approach is suited to the financial needs of a specific individual. It is very important to do your own analysis before making any investment based on your own personal circumstances.
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Transcript
00:00:05
Speaker
Hello and welcome to the very first episode of the brand new podcast here at Stockopedia. This is a very new venture for us. This is something we've not done in house before. So I will say upfront that we are really keen to get your feedback, your comments, your suggestions. ah There is a link in the episode description and so wherever you are listening to a very short survey if you could go and fill that out once you've listened to this episode today that would be very much appreciated it really helps us ah improve and make the podcast as valuable and as useful for you as possible
00:00:42
Speaker
ah There are three parts to this episode. We're going to start by reviewing the week's key headlines and hopefully go underneath the headlines a little bit to uncover some of the key investing lessons that we can learn from those. In part two, we're going to talk a little bit about an article our CEO Ed wrote on Stockopedia this week.
00:01:01
Speaker
about the phrase ahead of expectations in trading updates. ah We're going to dig a little deeper into that and see what we can learn. And in the final part, we're going to pick a winner of the week, and then we're going to look ahead to next week's economic announcements and company updates to give you a little sneak preview of what you can expect from the week ahead. ah My name is Lawrence. I'm the host of today's episode. I'm joined today by two of our analyst team is here at Stockopedia. Graham Neary. Hello.
00:01:30
Speaker
Hello, how are you doing? I'm very well, thank you. How are you? Yeah, I'm fine, thanks. And I'm also joined by Roland Head. i wrote and i Hi, Hi, Lawrence. Hi, Graham.
00:01:43
Speaker
Just before we get started, very quick little disclaimer. None of this is financial advice or a recommendation. Obviously, stocks can go down as well as up. It's important you do your own research. ah Graham and Roland and me, we may own shares in some of the companies that we discuss. Where we do, we are going to disclose that just for the sake of transparency.
00:02:04
Speaker
ah We may also chat through some other content or some other resources that we've published on Stockopedia. If we do, I'm going to include a link to it in the show notes so you can go and check that out and browse around some of the other content. So with that all said and done, let's move on to part one.
00:02:20
Speaker
So this week we had a decent bit of macroeconomic data come in, didn't we Graham? We had some US inflation data that came in as expected. ah The UK economy apparently shrank for a second month in a row that was just announced and ah European central bank interest rates were cut by a quarter basis point as expected. Graham, what stood out to you this week? Was there anything in particular that stood out among this week's macro announcements?
00:02:50
Speaker
um Well, I suppose it's just highlighting the different conditions ah when you compare the UK with and the Eurozone and with the United States. and We've got a very clear rate cutting trend in the Eurozone and in the US. Inflation is still not perfect, and a little bit higher than desired, but it seems that the Federal Reserve is likely to still cut rates a little bit. and They're still quite high there, um about four and a half percent, but probably going to see another
00:03:40
Speaker
cut there and then maybe that will be flat for a while and then in the UK we've got higher rates and and not much hope of change there for people who want to see ah rate cuts because the economy is still a little bit weak and um so on that basis and things look like they'll stay on hold um at 4.75%. So a little bit of weakness in the UK economy. and The US remains extremely strong, ah even at higher rates and than it had before. And the Eurozone, ah perhaps unsurprisingly, is the most keen to to cut rates.
00:04:37
Speaker
so ah more of the same and just highlighting the different economic conditions across the different regions. Yeah, you mentioned ah strength in the US. On that front I was really interested to see Google announcing this week their new quantum computing chip that they are calling Willow. And whenever I look at Alphabet's stock report on Stockipedia or any or of the other magnificent seven,
00:05:02
Speaker
I have to keep readjusting my brain when it comes to though the numbers that are on display there. With Google, we're talking a market cap in the trillions, $100 billion dollars of operating profit over the last a trailing 12-month period, which is a mind-boggling sum of money. Obviously, all of these companies are starting starting to they stretch the limits of valuation and and have done it you know throughout the last few years. but It seems to me that these companies, especially with their really high quality metrics, every time they start to look really way too expensive, they come out with an announcement about how their R and&D and their innovation departments have have just created new value and unlocked new value. I'm really keen to get your two reactions to that because so something that really stood out to me looking at the headlines this week.
00:05:58
Speaker
i think i mean um but I don't have a lot of understanding of of quantum computing, but I think one thing that strikes me that's interesting about this and and some of and and say Amazon as well is the way that Google is becoming it almost looks like they're becoming more and more vertically integrated. you know They're designing their own chips. Amazon has its own AI chip.
00:06:20
Speaker
that they see as a competitor to NVIDIA. they In areas like power supply and data centers, they you know more and more, they say the yeah you know their intellectual property and their own in-house assets, if you like, are in use rather than outsourcing these um these these areas of the business which which might have been the case in the past I think it's partly just a function of how big they are but and maybe also just a reversal of a trend really that but you know for things to be as
00:06:54
Speaker
is i kind of not fragmented, but for things to for companies to focus on their core activity and and to not own so many of the supporting functions as they once did. so and And this just seems another another step in that direction for for Google. Graham, what's your take on it? Yeah, so I am a former shareholder in and Alphabet. I did have to sell it I think it was earlier earlier this year I sold it, but I wrote an article on Stockopedia in 2020, which had the headline, just Google it, alphabet is the most powerful collection of monopolies ever assembled. And I just outlined in that article how alphabet was so powerful in so many different important
00:07:54
Speaker
areas with market shares that were extraordinary. you know I've gone through a phase in my investing life where I really focused on market share and Alphabet was just amazing. If you think about YouTube, Maps, ah Gmail, i mean any one of these things would be incredibly valuable in its own right, and the Android operating system.
00:08:22
Speaker
and So on the quantum computing chip, i I don't have any particular opinion, but I i do love Alphabet and um maybe I will own it again in the future on a stock specific basis. But it's trading at over 20 times earnings now. It may well be worth maybe what that might that might well be good value. I'm i'm not sure.
00:08:49
Speaker
One company that is absolutely not trading on a PE multiple that high is next on the agenda, and that is Boohoo, who this week an announced a string of updates about Fraser's Group and Mike Ashley's involvement or potential involvement on their board.
00:09:06
Speaker
Earlier in the week, the ISS, the Institutional Shareholder Services, sided with the Boohoo Board and recommended that holders vote against board change to allow Mike Ashley or Fraser to join the board. ah Today, the company announced that they are willing to, conditionally willing, sorry, offer Fraser's one board seat, but not to Mike Ashley himself or his, quote unquote, insolvency expert.
00:09:33
Speaker
So I guess mike my question here is so how did we get here? Like I look at the the share price history for Boohoo and it's now worth about 10% of what it was in 2020. Obviously we saw huge inflection of share prices during the pandemic, but how did we get here? Well, I suppose and if I was to start this topic off, I'd say Boohoo is really a company that succeeded because it won a price war. It competed on price, and that's how it took market share. And when it was no longer so competitive on price, ah its profits essentially disappeared. And that's I mean, that's a very simple way of putting it. and But and a competitive advantage that's based on price
00:10:31
Speaker
um That may not be a permanent thing. you know Where is the price advantage coming from? Is it coming from you know facilities where people are working in very difficult conditions? How long can that last for if there are if it's possible to to for you know for other companies to to do the same thing from different locations? i mean In simple terms, I would say that is a summary. um In terms of phrases,
00:11:01
Speaker
and Like I am not a huge fan of the Fraser's or Mike Ashley strategy. It's very confrontational. And ah the ah it's not just ISS, but Glass Lewis have now also sided with the Boohoo board against Fraser's. ah So I'm not sure who's going to win that battle, but and Mike Ashley ah is seen as a competitor.
00:11:32
Speaker
Or at least as somebody with potential conflicts of interest by Boohoo. So um I can understand their reluctance. and They may see him as some kind of a vulture ah taking advantage of their weakness.
00:11:47
Speaker
ah But personally, I wouldn't be touching Boohoo shares regardless of of who's on the board right now. Yeah, I did write in my notes for this episode, is this Mike Ashley swooping in on what he thinks is yet another failed brand that he can revive and flog in sports direct? Is there any sort of bull case left for Boohoo? I mean, I struggled to to find one. um Roland?
00:12:16
Speaker
I think it's to me from from from my sphere from my perspective outside the business, it seems like it could be 50-50. It might be that they There is some value left and that they yeah they can you know regain some of the following they've lost. But as Graham says, the original runaway success was built on very low prices and very quick delivery of new designs. And now there are other bigger companies doing that ah to and more competitively. So it's not clear to me. i wouldn't It looks a bit speculative too speculative to me. I'm not sure that I would put any money into Boohoo either.
00:12:54
Speaker
One company that had money pulled out of it this week was Domino's who released earlier in the week an in-line trading update. They also announced their new strategy which involves an incremental increase in spending on advertising and e-commerce development and asking for more patient timelines for new stores to hit targets.
00:13:16
Speaker
The market reaction certainly this week looks to have been quite negative. Closed at 340p on Monday. I then had a ah brief look at it yesterday and it was down to around 306. So that's a pretty sharp drop over a few days.
00:13:33
Speaker
Domino's itself, according to its stock report and our stock ranks, is high quality, fairly priced with moderate momentum. My read on this is that the strategy seems to be trying to thread the needle between growth, keeping its franchisees happy, who are obviously key to its expansion, rolling out new stores and then maintaining profitability.
00:13:59
Speaker
ah which to me seems fairly sensible. um Why do you think the market reaction was so negative to this? Yeah, I think that's right. Domino's always has to maintain this balance. um It's under pressure to to increase the number of stores it has ultimately from the the master franchisee, the parent company in the US, Domino's Pizza. But at the same time, there's been it's had problems or the relationship with franchisees hasn't been and entirely smooth sailing in recent years. I think they felt
00:14:31
Speaker
They were under pressure to expand, but not necessarily getting a fair slice of the the challenge Domino's faces, I think, underlying all of this in the UK, is that there aren't that many places left without a Domino's store.
00:14:46
Speaker
So the company wants to, the company has about 1,400 at the moment, which is very similar to McDonald's, but they want to increase this to about 2,000 by 2033, which coincidentally is the number of, roughly the number of stores Greg's has at the moment.
00:15:02
Speaker
So to do that, Domino's is having to split some of its existing franchise territories into two. And and you know it's it's kind of intuitively obvious that growing running two profitable stores in the same area that used to have one is going to require an increase in sales and maybe going to put some pressure on costs. So I think that's the background to it. Domino's, as you say, they've agreed a new package, a new framework that will see spending on marketing and technology bumped up a bit.
00:15:29
Speaker
And I think really the negative reaction this week is just the feeling that the market is is guessing that Domino's growth is going to be a little bit slower than maybe was previously hoped for. And for example, I think one telling point is that the financial incentives that are paid to franchisees for opening new stores, they were previously paid over three years, but now the same payment is going to be spread over five years. um And as a kind of as an indicator of how hard dealing with opening stores in split territories is the payments they the franchisees receive for that are 150,000. So 50% higher than the 100,000 payment for opening a store in a virgin territory. So really, I think it's just ah the idea that costs are going to be a little bit higher growth, maybe a little bit slower. And so there's no need to maybe push the share price as high as it has been in the past. But as you say, I think it remains a good business, like a strong brand.
00:16:28
Speaker
I don't see any exist existential concerns here. It's really just a question of pace, of growth, and and maybe a little bit of pressure and profitability. There is, after all, only so much pizza that the UK can eat.
00:16:45
Speaker
Yeah, I mean, the key underlying all of this, the key is that they have to try and find a way of making people order more often, more customers, but also more frequent purchases. And and it's not necessarily easy, especially as Graham said, the UK economy is a little bit sluggish and consumer spending is still under pressure. I remember seeing a comment from I believe it was somebody within Domino's management that they are actually a source company that also happens to sell pizza.
00:17:16
Speaker
Yeah, I mean, I probably should have mentioned that really. What it is, is that the franchisees by have to buy all their ingredients and I think probably all of their consumable supplies from Domino's. And that's about 70% of Domino's revenue each year and and a fair proportion of its profits too. so The franchisees have to do the heavy financial lifting of opening the stores, recruiting staff and and so on. And they have to buy all their supplies from the parent company so they don't have much control over costs. And so you can, it's easy to see why some franchisees may have felt a little bit squeezed at points in the past while Domino's has been trying to protect his profits. So yeah, that's that is ah it' a good description. Yeah.
00:18:01
Speaker
I just feel like it tracks quite well with mine and my wife's buying behavior where we will order, we'll order Domino's every so often, but every order we will stock up on their garlic and herb sauce pots. We'll have those with supermarket pizza. So maybe that's something that Domino's needs to to lean into. Graham, ah we're gonna shift now entirely to the other end of the market cap spectrum ah to chat about a tiny 30 million pound marketing agency called Brave Bison.
00:18:29
Speaker
I wanted to chat through this with you this week because it struck up an acquisition deal with a company called Engage Digital Partners Limited, he there another ah marketing company, a global sports one, links to Formula One, Cricket, Real Madrid, New Zealand, Rugby, the All Blacks. You said in the Daily Stock Market Report this week when you wrote about it that this was an acquisition deal that made a lot of sense to you and you were impressed by how they protected themselves against the the deal going against them. I will say that the update itself, the RNS they issued was full of words I couldn't understand, frankly. It was quite technical. So I wondered if you were able to help me understand in more simple terms the structure of the deal. Yeah, absolutely. And I think there are broader lessons that can be drawn from from this story.
00:19:25
Speaker
And so the main point here is that the the deal they announced could cost up to 10.6 million pounds. However, there's only 2.1 million pounds being paid upfront in terms of enterprise value. So that's what they're paying for for the business on day one.
00:19:54
Speaker
And the rest of it is in the form of warrants, which are basically options ah over Brave Bison's own shares and a large ah contingent consideration, which is subject to performance. Now, I didn't see those performance conditions explicitly spelled out, but Generally, what I look for in these types of deals is where the ah the deal can sort of pay for itself, at least to some extent, if things go well in the subsequent years. And I think that's basically and what we're looking at here. So the warrants, for example, are two million pounds, and they're on the Brave Bison share price itself.
00:20:50
Speaker
and they can't be exercised yet. um So the brave bison as a whole and the acquired company will both have to do reasonably well in order for all of this money to be paid. And I just think it's the type of deal that I like where the deal might pay for itself. There's a lot of conditions attached. I mean, if I was to draw an analogy, it would be as if you were looking at Premier League footballers who only got paid their normal salary if they played well every week. That's sort of what we're looking at here. break but you know The of this company will do well if the company itself has and Brave Bison as a whole does well. so you know In general, when I look for companies doing M&A, I like companies that wait patiently for
00:21:49
Speaker
the companies they're looking to buy to go into administration. So I own shares in Next. Next is very good at that. And I also own shares in a small turnaround company called Bovary. That's only a tiny little company. and But historically,
00:22:08
Speaker
That was very good at buying companies out of administration. and I don't like seeing deals where people are coming in and paying full price without many conditions attached. and So I think this example we're talking about this week is is a good example. ah Yes, thank you for the Premier League football analogies. so I tend to get along quite well with those. So more of those, please.
00:22:37
Speaker
So moving on to Serica Energy, so 500 million pound market cap oil and gas company announced this week that they were making an acquisition of assets from Park Mead Group. Roland, what does this deal allow them to do?
00:22:58
Speaker
Yes, so it's a relatively small purchase upfront that the committed expenditure is only about 14 million, although potentially there' there's a bit more in the future. But what this gives Serica really is kind of option value on a couple of oil fields in the North Sea where, in one case, the company um already has an interest and will now become the controlling operator, whereas before it was a minority investor in the field. So it's it's really option value. Serico has been working as a consolidator in the North Sea, buying up ah mature fields and using its infrastructure to run them for cash, effectively producing as much oil and only spending money where they're quite confident they'll be able to get it back in fairly quickly from new production.
00:23:48
Speaker
So this is just another increment really in that strategy I think and it comes with some attack attractive tax um tax losses embedded in as well.
00:24:00
Speaker
ah Yeah, I guess that was the next question running through my head as you were talking there. Yeah, sorry. yeah A lot of the the questions that investors have about UK oil and gas companies at the moment is how are they going to offset some of the windfall tax that the UK government is levying on them? Does this does this deal allow Serica to do that?
00:24:20
Speaker
I think it does to some extent, it's always a little bit hard to be sure because there's several different types of tax and several different, you know, activities that may be charged against it. But the deal apparently comes with 197 million pounds of ring fence corporation tax losses.
00:24:38
Speaker
181 million of supplementary charge tax losses which is an industry tax that was already in existence but I think has just increased slightly. And then a small amount of energy profits levy losses which was the windfall tax introduced um ah just a couple of years ago.
00:25:00
Speaker
So I imagine overall there'll be some tax benefit if Serica chooses to spend money developing these projects further as well and that's that's definitely an additional additional value for Serica Shell.
00:25:14
Speaker
ah Great. Thank you, Roland. I know you've got to go now, so thank you very much for your contributions today. Graham, moving on to S3, ticker STEM, the specialist scientific sector recruiter. They took a ah ah real chainsaw to their profit forecasts this week.
00:25:35
Speaker
I remember looking at their stock report a few years ago and and getting quite excited initially. and They seem to have really good quality metrics, great value metrics at the time. I think they still do, um especially off the back of this profit warning.
00:25:52
Speaker
But I zoomed out and looked at a 10 year price chart. And outside of a pandemic spike, it looks like a a really cyclical company. Price trades within a really well defined channel, I think it's called. Is this common amongst recruiters or is this cyclicality specific to S3?
00:26:18
Speaker
Yes, I mean the recruitment sector is a very tricky one and I generally ah don't and take a positive stance on recruitment companies because in general I would say that they are not the greatest sector to be involved in. I've sort of made an exception for S3 because its performance over so many so many years had been so consistent. Unfortunately, um they are no longer consistent. They've had to publish this enormous ah profit warning. One interesting feature of the profit warning is that it's for the financial year November 2025.
00:27:10
Speaker
So the year that's only just begun, you know, I suppose if I was, because I kind of do have a soft spot for the company, I don't own shares in it, but I, you know, I've kind of been a fan of the company for a while. I do think that they, it you know, we can admire the fact that they've cut their forecasts so much so fast with the financial year only just begun. And Another feature of it is that they announced a buyback at the very same time. And that's another kind of rare event that you see a buyback and a profit warning simultaneously. But it's a cash rich company and that's that's one of the reasons I've been a fan of theirs. and I did get a chance to speak to management this year. They explained to me that they did need quite a lot of cash just to
00:28:08
Speaker
fund the business and to fund their expected growth. um But and you know at least they they're willing to use their own cash to do that rather than borrow. And they've got a surplus. and you know This is one of those businesses where if they're not growing, they need less cash. So there's 20 million pounds ah being directed towards a buyback now.
00:28:35
Speaker
and so I'm um'm still fairly positive on this one, but I think the big problem probably is economic weakness in Europe, where they have a very large portion of their operations. They are an international business, but very heavy in Europe. And so kind of going back to what we were saying about the ECB and the Eurozone, um maybe
00:29:06
Speaker
Maybe things are pretty tough in Europe, even worse, even you know more difficult than in the UK in terms of the broader economy. And and maybe that's the reason. you know Recruitment is very, very sensitive to ah business sentiment. So even when the economy might not seem that weak, if businesses are a little nervous, that seems to really hammer the the performance of recruitment companies. So it's a tricky one.
00:29:33
Speaker
and I still have a, you know, a broadly positive view on management and the business, but it it is it is a tough period now. So when I saw this news, my mind, up whenever I see a profit warning, probably because I work at Stockipedia, I always think of, we have something called the Profit Warning Survival Guide,
00:29:55
Speaker
ah which I'm going to link in the the show notes. It's a really great piece of research that our team did a few years back into what happens before, on the day of and after a profit warning. And one of the real standout lessons for for me from that was that high quality companies tend to make better recoveries after a profit warning, ah far more so than lower quality companies do.
00:30:22
Speaker
Obviously, as we touched on, S3 has really great quality metrics. What do you see as being critical to S3's recovery from from this profit warning? Well, I suppose it's probably just the focus on their bread and butter. Their bread and butter is ah scientific or STEM.
00:30:48
Speaker
recruitment for contract positions and that has insulated them from a lot of the damage suffered by other recruitment companies which focused on permanent recruitment which is much more volatile or you know, other sectors. You know, STEM tend tends to be a pretty solid place in in the recruitment world. So, I mean, if they just stick to their knitting, they've got a, and you know, they've got a technology improvement program. They say that they're very modern. I believe that they have very modern systems. So, I guess that's it, you know, if they,
00:31:30
Speaker
If these economic conditions are the root cause and if those route can root cause conditions are temporary, then we can look forward to a rebound. But of course, nobody knows for sure. Some people might argue that there's been a permanent shift and that recruitment will be less profitable going forward permanently. that's that's a be that that or That's a risk that you face.
00:31:55
Speaker
Thank you, that makes a lot of sense. Finally, in part one, we are going to talk about impacts as an asset manager, 430 million poundish market cap. Today announced some bad news that they were losing a mandate to manage one of the St. James's place funds. This represented about 14% of their total assets under management and about 7.5% of their total revenue.
00:32:24
Speaker
This is, I think not that they reveal this, but this seems to be in response to some pretty major criticisms publicly of how St James's Place has done business. St James's Place is now cutting costs and removing mandates from external asset managers. Obviously this now means that impacts itself doesn't have any more exposure to St James's Place. This was one of their last funds, this was, sorry, the last of their funds they were managing.
00:32:52
Speaker
Their share price has not done very well recently at all. It's been a pretty persistent downtrend for a while. What would the potential catalysts be for a reversal in fortunes for for an asset manager like Impax? Yeah, so most fund managers, as listeners will will I'm sure be aware, most fund managers have been suffering outflows. I know there's very few ah exceptions to the rule.
00:33:21
Speaker
and impacts is struggling now in terms of flows um and this news is you know a single one-off major blow to AUM and to their flows. ah I mean the good news is that it's a very specific situation. St James's Place has received terrible media coverage in relation to its ah fees and the transparency of fees that it charges customers. Now, I don't have a strong view on that. ah Obviously, I'm a self-directed investor, so St. James's Place is catering to you know to people who need more help with their investments. um But and this is a very specific situation where St. James's Place
00:34:22
Speaker
had to make some big changes, probably not just for the public perception, but also because they probably were ah you know they probably had made some mistakes in terms of how they had decided to to allocate money. and But the impacts fund that's being shut and sort of switched away ah from impacts, it did underperform its peers, and but I don't think the underperformance is huge. I think it's a few percentage points. and
00:35:02
Speaker
so you know and Ordinarily, you I don't think that impacts would have lost this mandate. and I think performance probably is a reason, but I think there's an institutional imperative at St. James's place to make changes. I think that's the real reason here.
00:35:26
Speaker
and so Looking forward, if that you know this is just a one-off event, I think Impact is going to go back to being a company that's probably suffering outflows, like most of its peers.
00:35:42
Speaker
but where valuation is very cheap compared to the past. So it's down by more than 80% from its peak. Now, unfortunately, I did turn positive on impacts at 710p or something. It's now 264, so I was way too early. and But you know it was substantially higher than that. I think it was nearly 15 pounds at the peak.
00:36:11
Speaker
So it just goes to show how these valuations can go crazy. I think they overshoot to the positive. I think they overshoot to the negative. And personally, I'm inclined to think that impacts has overshot to the negative now, but I could be completely wrong on that point. and Time will tell, but I do like the valuation here and I don't own shares in it, but I'm certainly ah thinking about opening a position in this one now. yeah Certainly tempting when you think something has overshot to the negative. ah That's all we've got time for in part one. We'll be back after a very very short break to chat about the phrase ahead of expectations and a little bit of Games Workshop.
00:37:00
Speaker
Welcome back to part two. In this part, we're going to chat about an article that our CEO Ed Croft posted on the site earlier this week called, and I quote, ahead of expectations, the three most powerful words in investing.
00:37:15
Speaker
and now within that he referenced Games Workshop as a case study and now Games Workshop has had an excellent number of years but this week it announced that it had not only finalised its deal with Amazon to produce television series and other media ventures around the Warhammer 40,000 IP but it also joined the FTSE 100 so overall it's had a It's had a pretty good week. ah But the the reason it was included in this article is because its meteoric rise in share price. Share prices increased 27 times since it first published a trading update containing the words ahead of expectations. And if you have followed the work we've done quite recently on multibaggers in the last year or so,
00:38:09
Speaker
you'll know that this was quite a common trait among the top performing shares over the 10-year period of the study. ah They delivered a string of these ahead of expectations announcements. So, I mean, it's safe to say that the market's kind of become conditioned to these consistent beating for a forecast, these ahead of expectations announcements, these earnings surprises.
00:38:35
Speaker
For stocks like this, I guess my question when I look at shares like this is, is what sort of growth and what sort of upside tends to be priced in for stocks like this already? So I think most investors managing the like the largest sums of money are either passive or they are active with a timeframe of maybe two years. ah So these fund managers are, if they are doing independent research, of which not all of them are, but if they are, then they are looking to basically predict upside surprises. ah So I think that for, for say, the average private investor ah trying to get ahead
00:39:32
Speaker
I think there's just a lot to be said for understanding a business and understanding why a business is good, fundamentally a good business. And and that, I think, can lead to great performance over a timeframe that's much longer than two years. Games Workshop, that's another share that I've held before. I held it a couple of years ago. I i think I had a decent return, if I remember correctly. and but then I sold it. um It is an example of a company where I would say it is simply unique. It makes a unique product. ah you know If you were to say, what is the market share for tabletop wargame figurines? ah Games Workshop would be doing pretty well. I don't think there's many competitors in the space. I think at one point I i was trying to find competitors.
00:40:30
Speaker
and I couldn't really find any ah direct competitors. and I suppose there's you know if you make it a slightly broader space, you could include other types of board game ah as a potential competitor. But then I think there's always probably going to be that niche of people who want tabletop figurines. There's something cool about them. I never got into it myself, but I had friends who did growing up and I you know i was impressed and I could understand the the attraction. So if that niche is always going to exist and if Games Workshop is the undisputed number one with basically no competition, then I think you've got a good a recipe there for strong returns ah straight off the bat.
00:41:22
Speaker
and You've got intellectual property. ah you know In some ways, you could look at Games Workshop as an answer to Disney, you know on obviously on a tiny scale. But you know it's it's got that intellectual property that's unique, that it owns, that it can license. And and you've also got ah management who are very shareholder-oriented. So ah Kevin Rountree has being delivering cash to shareholders. He's clearly very focused on how much cash he can provide for shareholders, running the business for cash, but but also for growth.
00:42:09
Speaker
and you know people who've been watching the stock for a long time will know that it's a little bit eccentric and how it does things. I like that personally. I like companies that are willing to do things their own way, making totally irregular, unpredictable dividend announcements that are at are that are at the same time delightful for shareholders. And the intellectual property just seems to get more and more valuable. So it's it's a it's an absolute winner in that regard.
00:42:40
Speaker
ah I mean, I'm not in any rush to to own the shares. I don't know if I'd be outright green on them today or if, you know, you have to take the valuation into account. It's obviously going to be highly rated at this stage, but I'm glad that it's in the FTSE 100 because I think the FTSE 100 needs more quality companies and and this is a good example of one of them.
00:43:06
Speaker
I thoroughly enjoy the idea of Games Workshop unlocking a new stream of revenue through Games Workshop World theme parks around the world. I know. It's a fantastic idea. I also noticed that there's there's a massive secondary market for their figurines. People are taking them, ah they are painting them, and then they're selling them on at an even bigger price. It's quite staggering.
00:43:31
Speaker
i How do you find other stocks like this, I mean why this is probably the million dollar question, but how do you find other stocks like this which are kind of boring but somehow just keep continually beating their expectations time after time after time? Well I mean I don't claim to be an oracle of ah you know earnings surprises but you know For the reasons I outlined in relation to Games Workshop, it is a unique company with unique strengths. If you're in companies where there's a lot more competition, then wins tend to be temporary, as we've discussed with you know with other companies in this podcast. So I think repeat ahead of expectations
00:44:26
Speaker
There has to be something special going on. It could be a permanent ah competitive advantage. and It could also be, I suppose this is something we need to be careful of, it could be earnings management where forecasts might be deliberately kept conservative so that they can be beaten. I do think some companies probably do that. It's not really a bad thing, but just something to be aware of.
00:44:56
Speaker
and The whole thing is a bit of a game between this comp between companies and brokers where you know earnings can be set you know we kind of wherever the the company really wants. So do need to be careful with that. um And yeah, I think that's that's sort of the way I look at it. i don't know if and I don't know if I can point you, give you any specific rules, but One observation I would make is that the the efficient market hypothesis is completely out of the window. I think Ed's article demolishes it very well. and you know The strong form of the efficient market hypothesis gives us a random walk and ah turns out that it's it's not a random walk at all and Ed's charts prove prove it.
00:45:51
Speaker
If you are a subscriber to our stock market research platform, you will be able to read Ed's article. If you've not done so already, I will link it in the show notes. We're going to take a very quick break and then we're going to come back for part three in which we'll pick a winner of the week other than games workshop. And we're also going to look ahead to next week's news.
00:46:15
Speaker
Welcome back to part three. We're going to kick this off with our winner of the week. My pick for for this week. I wanted to include something other than Games Workshop, so we're actually going to talk about one of our one of our customers, one of our subscribers. I spotted a comment from him um earlier this week. He was explaining his investment process and I wanted to to just shine a light on it.
00:46:38
Speaker
For context, he was shouted out by our editorial team because he'd got in touch to say that his SIP, his self-invested personal pension, was up 82% year to date, which is obviously a phenomenal return.
00:46:53
Speaker
um So I just wanted to call out his process because it's it's incredibly systematic and Graham, I wanted to to get your take on it. So his process is he takes his total portfolio equity value, he divides it by 10 to get a ah position size per stock. He then runs some screens to find potential candidates that are both high quality and high momentum using our stock ranks.
00:47:21
Speaker
These can be in the EU, the UK or the US. He also looks for ones that have increasing broker estimates for the current and next year and then he selects his preferred candidates. He wants stocks that are currently in an uptrend and that are either close to or currently setting ah new highs recently. As he says, winners keep winning.
00:47:44
Speaker
He buys the stocks in GBP and this is the bit that stood out to me because he says I do no company research beyond the output of the screening process and he repeats that in the comment because he says it makes a lot of people who think you need company and or business knowledge to invest a little bit unsettled. He sells stocks if they release bad news if the share price drops unexpectedly without a wider market pullback or if the share price stalls for an extended period or if its quality or momentum falls. He says he doesn't care about exchange rates in fact by owning stocks in multiple currencies he thinks he's spreading the risks. He says he knows he will lose some interest as a result of withholding tax but he's more focused on capital growth than his dividend income.
00:48:36
Speaker
Now, to me, this this sounds like a huge win for systematic investing as an approach to the stock market. Graham, I'm curious, what, if any, do you see as the drawbacks to investing like this? Why why doesn't everybody do this?
00:48:55
Speaker
I mean, a simple answer would be that if if there's a winning method, then it it goes away as soon as lots of people are doing it. So you know there's there are many, many different ways to to win. And and you know this ah this subscriber has has found something that works, and long may it continue.
00:49:23
Speaker
and Personally, I'm more of a value guy than a momentum guy. So QM candidates and would probably make me nervous, but then you know he's got this method which um which I guess is reallocating on a regular basis. So it's so it's working because momentum does seem to be a real factor that does work in the stock market over you know if you get your timeframe right.
00:49:55
Speaker
So, um I mean, if I was to try and be as negative as possible and find find a problem, I would probably say that when you invest like this, you could potentially buy something that's just an outright fraud and that just disappears someday, which which has happened ah you know to some high profile companies ah that we've looked at, like Patisserie Valerie ah disappeared one day, um the Chinese stocks disappeared one day. and But you know at the same time, lots of people who do fundamental research
00:50:39
Speaker
ah get trapped by these things as well. So ah you know I'm really impressed that the subscribers got such good returns. It doesn't sound as if it costs them a huge deal of time, research time or ah calculation time. So as I said, long may it continue.
00:51:02
Speaker
Absolutely, I couldn't agree more. Looking forward to the week ahead, our head of content, Megan Boxall, has published an article about this for our subscribers, including some extra analysis on some of the companies that are reporting next week. ah So if you're a subscriber, you can go and read that in ah in the discussion section of our research platform. I have included a link to that in the show notes as well.
00:51:28
Speaker
Looking at the macro announcements next week, on Tuesday we've got the UK unemployment rate and the uk US s announcing their retail sales data, which I believe does include the November and the Black Friday period. On Wednesday we've got UK inflation, the US fed interest rate decision. Day later on Thursday we've got the Bank of England's interest rate decision.
00:51:52
Speaker
Friday we've got some more US inflation data as well as some yeah UK retail sales data. I imagine that this does also cover the same period around November and Black Friday. Obviously at the start of the podcast we touched on Graham's thoughts as to though the macro situation and what he anticipates happening next week.
00:52:12
Speaker
There's also a number of companies reporting. It is a little quiet. um There's a lot of AGMs happening next week as companies wrap up for the calendar year. So next week we have picked out Tristel, Allergy Therapeutics, Chemring, Videndum, Integrifin, Beaks Financial Cloud, Dot Digital Time Finance in the UK and in the US. FedEx and Nike are two of the the big ones reporting next week.
00:52:42
Speaker
or scheduled to issue updates. As I said, you can read more about those and some extra analysis that we've done in the article linked in the show notes. That's all we've got time for this week. Thank you so much for listening to this first episode.
00:52:57
Speaker
I really hope you enjoyed it. If you did, um I'd love it if you could subscribe or follow wherever you were listening. And as I said at the beginning, we have a very short survey that's linked in the show notes to capture some of your feedback, some of your thoughts, what you liked, what you didn't like. We're very happy to hear both of those. It helps us improve and makes this podcast as good as we can make it for you. So please do take the time to go fill that out.
00:53:22
Speaker
Graham, thank you very much for your time. I really appreciate it. And thanks again to Roland who joined us in part one. Thank you, Lawrence. And we will see you at the same time next week. Bye for now.